EU tightens rules on big London-based investment firms

People walk through the Canary Wharf financial district of London, Britain, December 7, 2018. REUTERS/Simon Dawson

February 27, 2019

By Francesco Guarascio

BRUSSELS (Reuters) – European Union governments and lawmakers have reached agreement on tighter rules for asset managers and investment firms offering “bank-like” services, such as proprietary trading and underwriting of financial instruments.

The agreement, which was reached late on Tuesday and confirmed an agreement in January by EU states, will give the European Commission more power in overseeing foreign financial firms operating in the EU and more clout over London-based financial firms after Britain leaves the EU.

The overhaul also imposes stricter liquidity and capital requirements on large EU investment firms, partly tightening an initial proposal put forward by the European Commission in December 2017.

“The agreement further strengthens the equivalence regime that would apply to third country investment firms,” the EU said in a statement. The Commission will also get more power to assess whether foreign rules are compatible with EU regulations.

More than half of the 6,000 European investment firms have their EU headquarters in Britain, although many have started setting up continental offices to ensure they can continue to serve clients after Brexit.

Under the new rules, which require final approval by the European Parliament and the EU Council, the Commission would assess whether foreign investment firms operate as banks. If so, they would be subject to stricter conditions, especially if they are deemed “of systemic importance”.

“With the investment firm review, the EU gets Brexit-ready,” said EU lawmaker Markus Ferber, who led the negotiations on behalf of the EU parliament.

BLACKROCK

EU legislators also agreed to cut in half a threshold for the automatic application of the strictest capital and liquidity rules for EU-based firms. The Commission initially had proposed applying them only to firms with assets of more than 30 billion euros ($34.20 billion).

Consequently, investment firms with assets of 15 billion euros or more would automatically be subject to the same requirements as large banks. Those with assets between 5 billion and 15 billion euros could face lighter requirements unless their activities pose risks to financial stability, an EU statement said.

Firms like Barclays Capital Securities Limited, Goldman Sachs International, Merrill Lynch International and Morgan Stanley International fall under the new, stricter rules and will be supervised like large banks by the European Central Bank.

The agreement “levels the playing field between the largest investment firms and the largest banks; they will follow the same rules,” the Commission’s vice-president in charge of investment and growth, Jyrki Katainen, said in a statement.

The reform also increases transparency requirements for large asset managers, such as Blackrock, State Street and Vanguard, said Sven Giegold, one of the lawmakers who participated in the legislative talks.

Large asset managers will be required to disclose ownership of more than 5 percent of the shares in a company and how they vote at general meetings of firms they co-own, Giegold said.